China's high-yield property bonds hand investors a 22% loss

China's high-yield property bonds hand investors a 22% loss

Dollar-denominated bonds sold by junk-rated Chinese developers remain a minefield for investors, as another depressing year of losses and defaults in the real estate sector draws to a close, according to money managers.

"China's property sector is not out of the woods," said Andy Suen, co-head of Asia ex-Japan fixed income at PineBridge Investments, which managed US$155.2 billion across global asset classes as of September.

"We don't have high [confidence] in this sector. We're still very cautious."

China's US dollar-denominated high-yield bonds, dominated by property debt, have landed investors a 22 per cent loss so far this year, after a 33 per cent slump in each of the past two years, according to the ICE Bank of America Index.

Distress continued to spread through the property industry this year as China's post-pandemic economic recovery slowed.

Country Garden, once considered a financially healthy private developer, found itself mired in crisis this summer and went on to miss a coupon payment of US$60 million in October. China Evergrande Group, meanwhile, awaits another hearing next month as its insolvency process continues.

"We have seen the biggest wave of defaults already," Suen said. "And obviously for survivors we expect further defaults" as sales momentum weakens and prices soften.

The default rate for the high-yield property bonds will remain elevated next year as house sales continue their slide, putting more strain on already stretched liquidity conditions, Goldman Sachs said in November.

PineBridge's Asian High Yield Total Return Bond Fund, co-managed by Suen, has returned 3.7 per cent so far this year, versus a peer-average return of 6.4 per cent, according to Bloomberg data. He has sold down all the bonds issued by Dalian Wanda Group subsidiaries and Country Garden this year in the fund's portfolio.

Suen said he has cut the China high-yield allocation to around 20 per cent from 30 to 35 per cent since the beginning of the year.

Proceeds from maturing bonds were not reinvested in China. Suen has slashed investments in local government financing vehicles and some small financial institutions amid concerns about their credit health during the property downturn.

"The China property sector [is a] very distressed space. We are still quite pessimistic, and we don't think the policy support is enough to revive these names," Suen said, referring to the major developers that have found themselves in trouble. "We have been investing in other markets in Asia."

He sees better opportunities in areas such as Asian banks and Macau gaming companies, as well as India's renewable energy sector.

His view resonates with market concerns about the state of China's property market, which has deteriorated despite state-driven measures to spur home purchases in many mainland cities.

"We've had the ongoing efforts to deleverage the property sector," Leonard Kwan, portfolio manager at T Rowe Price said in a media briefing on Tuesday. "It's going to take a number of years to repair this sector. It's not going to be an instant fix."

Steven Oh, global head of credit and fixed income for PineBridge, added: "Sentiment is still quite negative with respect to China. I think there needs to be some comfort that the worst is behind us" for investor confidence to return.

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